11-003982PL Department Of Financial Services vs. William P. Mccloskey Status: Closed Recommended Order on Wednesday, April 18, 2012.

Summary: Insurance agent sold viaticals, which were not registered as securities.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF FINANCIAL )

SERVICES , )

)

Petitioner , )

)

vs. ) Case No. 11 - 3982PL

)

WILLIAM P. MCCLOSKEY , )

)

Respondent . )

)

RECOMMENDED ORDER

Pursuan t to notice, a final hearing was held in this case on

January 24 and 25 , 2012, by video teleconference with sites in

Tallahassee and Sebastian, Florida, before Susan Belyeu Kirkland,

an Administrative Law Judge of the Division of Administrative

Hearings.

A PPEARANCES

For Petitioner: James A. Bossart, Esquire

Michael Davidson, Esquire

Department of Financial Services

612 Larson Building

200 East Gaines Street

Tallahassee, F lorida 32399 - 0333

For Respondent: H. Richard Bisbee, Esquire

Dannie Hart, Esquire

1882 Capital Circle, Northeast, Suite 206

Tallahassee, Florida 32308

STATEMENT OF THE ISSUES

The issues in this case are whether Respondent violated

sections 626.611(7), 626.611(9), 626.611(16), 626.621(2),

626.621(6), 626.9541(1)(e)1., 626.9927(1), 626.99275(1)(b), and

626.99277(6), Florida Statutes (2003) , 1/ and, if so, what

disci pline should be imposed.

PRELIMINARY STATEMENT

On June 7, 2011, Petitioner, Department of Financial

Services (Department), filed a three - count Administrative

Complaint against Respondent, William P. McCloskey

( Mr. McCloskey), alleging that he violated sec tions 626.611(7),

626.611(9), 626.611(16), 626.621(2), 626.621(6),

626.9541 (1)(e)1., 626.9927(1), 626 .99275(1)(b), and 626.99277(6).

Mr. McCloskey requested an administrative hearing, and the case

was forwarded to the Division of Administrative Hearings o n

August 8, 2011, for assignment to an administrative law judge to

conduct the final hearing. The final hearing was originally set

for October 27, 2011, but was continued twice.

Official recognition was taken of matters as set forth in

Orders dated Janua ry 5, 2012; January 23, 2012; and January 24,

2012. At the final hearing, official recognition was taken of

Securities and Exchange Commission v. Mutual Benefits, Corp. ,

No. 04 - 60573 - CIV - Moreno (S.D. Fla. February 14, 2005)(order

granting preliminary inju nction) and In the Matter of: Life

Options, Int ernationa l, Inc. , Final Order No. 0096 - I - 8/96

(Fla. DBF Nov. 26, 1996).

At the final hearing, the Department called George Bode as

its witness. The testimony of Allen J. Clemente and Julia Teny

w as presented by deposition. Petitioner's Exhibits 1 through 10

were admitted in evidence . Official recognition was taken of

exhibits marked for identification as Petitioner's Exhibits 11

and 12.

At the final hearing, Mr. McCloskey testified on his own

behalf and cal led Robert Miles, Matthew Tamplin, Jose Flores, and

Susan Gorton as witnesses. Respondent's Exhi bits 1 through 13

were admitted in evidence. As a late - filed exhibit, Respondent

filed Respondent's Exhibit 14, which was admitted in evidence.

The two - volu me Transcript of the portion of the hearing held

on January 24, 2012, was filed on February 10, 2012. The one -

volume Transcript of the portion of the hearing held on

January 25, 2012 , was filed on February 23, 2012. The parties

agreed to file their propo sed recommended orders within ten days

of the filing of the last volume of the Transcript.

On February 28, 2012, Mr. McCloskey filed RespondentÓs

Motion for Extension of Time to File Proposed Recommended Order.

The motion was granted by Order dated Febr uary 29, 2012,

extending the time to file proposed recommended orders to

March 15, 2012. On March 13, 2012, Mr. McCloskey filed

Respondent's Second Motion for Extension of Time to File Proposed

Recommended Order , which was unopposed . The motion was grant ed

by Order dated March 14, 2012, and the time for filing proposed

recommended orders was extended to March 30, 2012. The parties

timely filed their proposed recommended orders, which have been

considered in the preparation of this Recommended Order.

FIND INGS OF FACT

1. At all times material to the Administrative Complaint,

Mr. McCloskey was licensed in Florida as an insurance agent. He

currently is licensed as a life and variable annuity agent and

health agent, life and variable annuity insurance agent, life

insurance agent, life and health insurance agent, non - resident

life and health and variable annuity agent, non - resident life

insurance agent, and a general lines insurance agent. He has

been working in the insurance business for approximately 24

yea rs. No prior disciplinary actions have been taken against

Mr. McCloskey.

2. In the latter part of 2003, a representative from Mutual

Benefits Corporation (Mutual Benefits) visited Mr. McCloskey to

discuss the offering of Mutual Benefits' viatical settl ement

products to Mr. McCloskey's clients . A viatical settlement

(viatical) is the purchase of an interest in the death benefits

of a life insurance policy for an economic benefit.

3. Mr. McCloskey was not familiar with viatical s . He

checked on Mutual Benefits by researching Mutual Benefits o n the

internet. He called the Department 's predecessor, the Department

of Insurance, and also looked on the Department of Insurance 's

website. When he contacted the Department of Insurance , he was

advised that vi atical s were regulated by the Department of

Insurance . Everything that he learned led him to believe that

Mutual Benefits was a legitimate business. Mr. McCloskey also

called the office of Mutual Benefits and talked to

representatives who seemed to be fa miliar with insurance products

and who answered questions that he had concerning Mutual

Benefits.

4. After researching Mutual Benefits, Mr. McCloskey decided

t o o ffer viatical s from Mutual Benefits to his customers. On

October 9, 2003, Mr. McCloskey ente red into a Sales

Representative Agreement with Mutual Benefits . The agreement

contained the following provision:

Representative [Mr. McCloskey] hereby

warrants to MBC that he/she has obtained and

holds valid and current securities and/or

insurance licenses that are required by the

law of a prospective purchaser's and

Representative's respective state of

residence, if any , to market, solicit, offer,

or sell viatical or life settlements to that

prospective purchaser.

Mr. McCloskey understood that he would be selling the viaticals

pursuant to his life insurance license. Mr. McCloskey understood

that there were many other insurance agents in Florida who were

selling Mut ual Benefits' viatical products.

5. When Mr. McCloskey sold a viatical from Mutual Benefit s,

he received a commission. The total percentage of his income

derived from the sale of viaticals was approximately five percent

of his total business income.

6. The viatical settlement purchase agreement forms at

issue in this case had been approved fo r use by the Department of

Insurance on February 5, 2002. The viatical settlement purchase

agreements provided :

This Agreement covers the purchase of an

interest in the death benefit of a life

insurance policy or policies insuring the

life of persons who are either terminally ill

or have an estimated life expectancy of 72

months or less.

* * *

WHEREAS, both parties understand and agree

that neither Mutual Benefits Corp., nor any

representative of Mutual Benefits Corp., is

in any way acting as an insurance agent,

broker, dealer, or representative, or a

securities broker, dealer or representative,

and the parties further agree that this

transaction does not constitute the offer for

sale or the sale of a security.

* * *

The only benefit the Purchaser will receive

pursuant to this Agreement will be payment of

the agreed portion of the death benefit upon

maturity of the life insurance policy(ies).

Policies are priced at a discount of the

death benefit which depends on the projected

life expec tancy of each insured. Mutual

Benefits Corp. makes no representation or

warranty as to the specific date when a

policy will mature. The return realized by

the Purchaser does not represent an annual

return. An annual return cannot be

determined until the policy(ies) in which the

Purchaser obtains an interest matures.

* * *

Purchaser hereby represents and warrants that

he/she is sophisticated in financial matters

and/or has access to professional services,

has adequate means for providing for cur rent

financial needs and possible personal

contingencies, and also acknowledges that

once the policy close s the funds committed

are not liquid and the funds are not

available until the policy matures.

Purchaser hereby also acknowledges that the

life expec tancy(ies) provided by the

reviewing physicians are only estimates.

Mutual Benefits Corp. does not make any

warranties regarding the accuracy of these

estimates. Purchaser further acknowledges

that the policy may mature before or after

the projected life expectancy. Purchaser

also represents that he/she is able to bear

the risk of the purchase of a policy(ies) for

an indeterminate period and will only commit

himself/herself to a purchase which bears a

reasonable relationship to his/her net worth.

* * *

This agreement is voidable by the Purchaser

at any time within three (3) days after the

disclosures mandated by Florida Statute

§ 626.99236 are received by the Purchaser.

* * *

Pursuant to the terms of the Viatical

Settlement Purc hase Agreement, Mutual

Benefits Corp. will escrow with a trustee

funds for future premium payments for a

minimum of the projected life expectancy of

the insured, or longer at the company's

discretion, and has agreed that the interest

on those funds and any unused premiums may be

retained as a reserve for payment on those

policies where the insured outlives his/her

projected life expectancy. Additionally,

Viatical Services, Inc., a company the

Purchaser may select to perform post closing

services, has agree d to establish a premium

reserve account to pay unpaid premiums for

those policies that exceed their projected

life expectancy if the above referenced

trustee premiums are ever exhausted.

Viatical Services, Inc.'s agreement to pay

any unpaid premiums is l imited to the

exhaustion of the funds in its premium

reserve account. In the event the trustee

and Viatical Services Inc.'s respective

premium reserve accounts are exhausted, the

Purchaser may be responsible for a payment

of his/her pro rata share of any unpaid

premium. In the event the Purchaser is

required to pay premiums, such payments will

reduce the fixed returns referenced above.

* * *

The purchase of the death benefit of one or

more life insurance policies should be not be

considered a l iquid purchase. While every

attempt is made to determine the insured's

life expectancy at the time of purchase, it

is impossible to predict the exact time of

the insured's demise. As a result, the

Purchaser's funds will not be available until

after the d eath of the insured . It is

entirely possible that the insured could

outlive his/her life expectancy, which would

delay payment of the death benefits under the

Viatical Settlement Purchase Agreement.

7. Mutual Benefits estimated the life expectancies of t he

insureds and determined which policies would meet the estimated

life expectancies chosen by the purchasers. The choice of which

policies would be purchased would be done after the closing of

the purchase agreement between the purchaser and Mutual Benef its.

Mutual Benefits would provide the medical records of the insureds

to the purchasers after the execution of the purchase agreement.

In some instances, the purchasers would not be purchasing a full

interest in the insurance benefits, but would be one among others

who were purchasing interests in a specific insurance policy.

Mutual Benefits would determine the amount that needed to be

escrowed for the payment of future premiums, and the escrow agent

would disburse the funds for the premiums as they cam e due.

8. The viaticals offered by Mutual Benefits were investment

contracts that were required to be registered in accordance with

chapter 517. At the time that Mr. McCloskey offered the

viaticals to his clients, he did not understand that the

viatical s could be considered as securities which had to be

registered . Neither Mutual Benefits nor Mr. McCloskey was

registered with the Office of Financial Regulation (OFR) of the

Financial Services Commission at the time the viaticals at issue

were sold.

9. I n December 2003, George Bode, who was retired and

approximately 74 years old, saw a newspaper advertisement placed

by Mr. McCloskey concerning various types of investments.

Mr. Bode contacted Mr. McCloskey and made an appointment to meet

with Mr. McCl oskey at his office in Melbourne, Florida, to

discuss potential investments for Mr. Bode.

10. One of the types of investments that was discussed was

viatical s . Mr. McCloskey never represented that viatical s were

securities and made no guarantees concerni ng the outcome of the

purchase of viatical s . Mr. Bode understood that there was some

risk involved in the purchase of the viatical s and that the

insured might not die within the estimated life expectancy.

Mr. Bode was also aware that he might have to p ay additional

funds for premiums depending on the longevity of the insured.

11. On December 9, 2003, Mr. Bode entered into a Viatical

Settlement Purchase Agreement with Mutual Benefits. The purchase

price was $10,000.00. The estimated life expectancy o f the

insured was 36 months. The rate of return if the insured died

within the 36 months was 42 percent. The insured did not expire

within the estimated 36 months, and Mr. Bode was required to pay

for additional premiums for the viaticated insurance poli cy after

the expiration of the 36 months.

12. Sometime in November 2003, Alan Clemente (Mr. Clemente)

saw an advertisement placed in a newspaper by Mr. McCloskey. The

advertisement was for annuities. Mr. Clemente went to

Mr. McCloskey's office to discus s possible investments.

Mr. Clemente told Mr. McCloskey that he had lost $100,000.00 with

a financial planner and was looking for a safe investment.

13. Mr. McCloskey talked with Mr. Clemente about several

types of products that his agency offered, inclu ding annuities,

certificates of deposit, and viaticals. Mr. Clemente was not

interested in certificates of deposits, but was very interested

in annuities, such as Mr. McCloskey had advertised in the

newspaper. Mr. Clemente was also interested in viatical s , and

Mr. McCloskey made a presentation to Mr. Clemente concerning

viaticals. Mr. Clemente did not make a purchase at the first

meeting with Mr. McCloskey.

14. A few weeks after his initial visit with Mr. McCloskey,

Mr. Clemente came to Mr. McCloskey 's office and purchased a n

annuity for $50,000.00. The annuity policy was delivered to

Mr. Clemente on December 5, 2003, at Mr. McCloskey's office.

15. When Mr. Clemente came to pick up his annuity policy,

he again discussed viaticals with Mr. McCloskey. Mr. Cl emente

understood that a viatical was the purchase of an insurance

policy of someone who was terminally ill and when the person died

that he would get his money back plus a return on the investment

depending on when the person died. He wanted to i nvest in a

viatical for which the insured's life expectancy was estimated at

three years, which would result in a 42 percent return on his

money. He also understood that he would be responsible for the

payment of the premiums on the policy until the insur ed died.

16. Mr. McCloskey went over the Viatical Settlement

Purchase Agreement with Mr. Clemente. He told Mr. Clemente that

he thought it was a good investment. Mr. McCloskey never

guaranteed that Mr. Clemente would get a 42 percent return on his

money . Mr. McCloskey told Mr. Clemente that "in the last ten

years that no one [had] lost any money in the contracts,

principal and interest, and no one [had] to pay premiums."

17. Mr. Clemente entered into a Viatical Settlement

Purchase Agreement with Mutua l Benefits on December 5, 2003. The

purchase price was $20,539.00 for two policies for insureds whose

life expectancies were estimated to be three years. The return

listed in the policy was 42 percent. This return was conditioned

on the insured s dying w ithin the three - year period.

18. Mr. Clement initialed each page of the agreement and

signed the agreement. Additionally, Mr. Clemente executed a

Purchaser Suitability Questionnaire which stated:

I have carefully examined m y financial

resources, investme nt objectives, and

tolerances for risk. After conducting this

examination and reviewing the terms of the

Viatical Settlement Purchase Agreement, I

have determined that this purchase is

appropriate for me.

I sufficiently understand the risk factors

and ob jectives associated with this

investment, either independently or as

explained to me by one or more professional

financial advisors not affiliated with or in

any way compensated by Mutual Benefits

Corporation or its representatives.

I have adequate means of providing for my

current financial needs and personal

contingencies, have no need for liquidity of

this investment, and I am able to bear the

financial risk of a purchase of life

insurance policy death benefits for an

indefinite period of time.

19. In the early part of 2004, Carol Mauter (Ms. Mauter)

came to Mr. McCloskey's office seeking some information about

products that would generate an income for her mother, Julia Teny

(Ms. Teny) . Mr. McCloskey discussed various products with

Ms. Mauter, includ ing single premium immediate annuities and

viatical settlements.

20. A few days after Ms. Mauter's initial visit, she

returned to Mr. McCloskey's office with Ms. Teny , who was

approximately 87 years old . On March 3, 2004, Ms. Teny purchased

a single pr emium immediate annuity for $30,000.00. This annuity

was purchased to provide an income stream for Ms. Teny for five

years.

21. Mr. McCloskey discussed the purchase of a viatical

settlement for an insured whose life expectancy was 48 months.

It was deci ded that the purchase of the viatical would suit

Ms. Teny's needs since it was estimated that the return on the

viatical purchase would occur shortly before the annuity ended,

and the proceeds from the viatical could be used to purchase

another single p remium immediate annuity to continue a stream of

income for Ms. Teny.

22. Mr. McCloskey gave Ms. Mauter and Ms. Teny a brochure

from Mutual Benefits concerning viaticals. He did not guarantee

a return on the purchase of the viatical nor did he guarantee

that Ms. Teny would never have to pay any premiums on the policy.

He did tell Ms. Mauter and Ms. Teny that as of the date of their

visit to his office persons purchasing viatical settlements from

Mutual Benefits had not lost any principal or interest or p aid

any premiums. There was no evidence presented to show that this

statement was not true or that Mr. McCloskey knew that the

statement was not true at the time the statement was made .

23. On March 8, 2004, Ms. Teny executed a Viatical

Settlement Purcha se agreement with Mutual Benefits for policies

on insureds whose life expectanc ies w ere estimated to be 48

months. The purchase price was $70,000. 00.

24. Ms. Teny initialed each page of the purchase agreement,

but she relied on the judgment of her daught er concerning the

understanding of the terms of the purchase agreement.

25. On May 3, 2004, the Securities and Exchange Commiss ion

(SEC) filed in the United District Court of the Southern District

of Florida an Ex Parte Motion for Temporary Restraining Or der and

Other Relief and Entry of Preliminary Injunction against Mutual

Benefits and others, claiming Mutual Benefits was defrauding

investors by offering unregistered securities in the form of

investment interests in viatical settlement contracts. The

mo tion for a temporary restraining order was granted. On

February 14, 2005, the court entered an Order Granting Motion for

Preliminary Injunction , finding that there was sufficient

evidence of fraud committed by Mutual Benefits, specifically that

the announ ced life expectancies of the insureds were a product of

fraud. The court enjoined Mutual Benefits from further

violations of the anti - fraud and registration provisions of the

Federal Securities Laws in connection with the offering of

viatical settlement p roducts. SEC v. Mutual Benefits, Corp. , No.

04 - 60573 - CIV - Moreno ( S.D. Fla. February 14, 2005)(order granting

preliminary injunction). On May 4, 2005, the court entered an

Order Appointing Receiver for Mutual Benefits. SEC v. Mutual

Benefits , No. 04 - 6057 3 - CIV - Moreno (S.D. Fla. May 4, 2005)(order

appointing receiver).

26. Mr. Clemente received notice about a year and a half

after he entered into the viatical settlement agreement with

Mutual Benefits that Mutual Benefits had been placed in

receivership. H e was instructed by the receiver that premiums

were due on the insurance policies that were covered by

Mr. Clemente's viatical settlement agreement and that in order to

preserve his investment, Mr. Clemente would be required to pay

the premiums on the poli cies. Due to the high cost of the

premiums, Mr. Clemente elected to forfeit three of the policies

covered by his viatical settlement agreement. Mr. Clemente is

currently paying the premiums on one policy. To date, the

receivership had paid Mr. Clemente approximately $5,000.00 out of

his original purchase price.

27. Sometime after Ms. Teny purchased her viatical, she

began receiving letters requesting her to pay the policy premiums

on the policies covered by her viatical settlement agreement.

Ms. Teny d id not know who sent the requests, but given the timing

of the appointment of the receiver, it can be inferred that the

receiver was requesting the payments. Ms. Teny initially paid

the premiums, but as the amounts of the premiums increased to as

much as over $10,000.00 in 2008, Ms. Teny allowed the policies to

lapse and lost her entire investment of $70,000.00.

28. Mr. Bode was also requested to make premium payments on

the policies covered by his viatical settlement agreement.

Mr. Bode made some paymen ts, but stopped making payments and

forfeited his purchase price of $10,000.00.

CONCLUSIONS OF LAW

29. The Division of Administrative Hearings has

jurisdiction over the parties to and the subject matter of this

proceeding. §§ 120.569 and 120.57, Fla. Sta t. (2011).

30. The Department has the burden to establish the

allegations in the Administrative Complaint by clear and

convincing evidence. Dep't of Banking & Fin. v. Osborne Stern &

Co. , 670 So. 2d 932 (Fla. 1996).

3 1 . The Department alleges that Mr. McCloskey violated

sections 626.611(7), 626.611(9), and 626.611(16), which provide:

Grounds for compulsory refusal, suspension,

or revocation of agent's, title agency's,

adjuster's, customer representative's,

service representative's, or managing general

a gent's license or appointment. -- The

department or office shall deny an

application for, suspend, revoke, or refuse

to renew or continue the license or

appointment of any applicant, agent, title

agency, adjuster, customer representative,

service representat ive, or managing general

agent, and it shall suspend or revoke the

eligibility to hold a license or appointment

of any such person, if it finds that as to

the applicant, licensee, or appointee any one

or more of the following applicable grounds

exist:

* * *

(7) Demonstrated lack of fitness or

trustworthiness to engage in the business of

insurance.

* * *

(9) Fraudulent or dishonest practices in the

conduct of business under the license or

appointment.

* * *

(16) Sale of an unregistered security that

was required to be registered, pursuant to

chapter 517.

3 2 . The Department alleges that Mr. McCloskey violated

sections 626.621(2) and 626.621(6), which provide:

The department or office may, in its

discretion, deny an applica tion for, suspend,

revoke, or refuse to renew or continue the

license or appointment of any applicant,

agent, adjuster, customer representative,

service representative, or managing general

agent, and it may suspend or revoke the

eligibility to hold a licen se or appointment

of any such person, if it finds that as to

the applicant, licensee, or appointee any one

or more of the following applicable grounds

exist under circumstances for which such

denial, suspension, revocation, or refusal is

not mandatory unde r s. 626.611:

* * *

(2) Material misstatement,

misrepresentation, or fraud in obtaining the

license or appointment or in attempting to

obtain the license or appointment.

* * *

(6) If, as an adjuster, or agent licensed

and appointed to adjust claims under this

code, he or she has materially misrepresented

to an insured or other interested party the

terms and coverage of an insurance contract

with intent and for the purpose of effecting

settlement of claim for loss or damage or

benefit u nder such contract on less favorable

terms than those provided in and contemplated

by the contract.

3 3 . The Department alleges that Mr. McCloskey violated

section 626.9541(1)(e)1., which provides:

(1) The following are defined as unfair

methods of comp etition and unfair or

deceptive acts or practices:

* * *

(e) False statements and entries. --

1. Knowingly:

a. Filing with any supervisory or other

public official,

b. Making, publishing, disseminating,

circulating,

c. Delivering to a ny person,

d. Placing before the public,

e. Causing, directly or indirectly, to be

made, published, disseminated, circulated,

delivered to any person, or placed before the

public, any false material statement.

3 4 . The Department alleges that Mr. Mc Closkey violated

section 626.9927(1), which provides:

(1) A violation of this act is an unfair

trade practice under ss. 626.9521 and

626.9541 and is subject to the penalties

provided in the insurance code. Part X of

this chapter applies to a licensee un der this

act or a transaction subject to this act as

if a viatical settlement contract and a

viatical settlement purchase agreement were

an insurance policy.

3 5 . The Department alleges that Mr. McCloskey violated

section 626.99275(1)(b), which provides:

(1) It is unlawful for any person:

* * *

(b) In the solicitation or sale of a

viatical settlement purchase agreement:

1. To employ any device, scheme, or artifice

to defraud;

2. To obtain money or property by means of

an untrue statemen t of a material fact or by

any omission to state a material fact

necessary in order to make the statements

made, in light of the circumstances under

which they were made, not misleading; or

3. To engage in any transaction, practice,

or course of busines s which operates or would

operate as a fraud or deceit upon a person.

3 6 . The Department alleges that Mr. McCloskey violated

section 626.99277(6) which provides: "A person may not represent

that the investment in a viatical settlement purchase agreement

is 'guaranteed,' that the principal is 'safe,' or that the

investment is free of risk."

3 7 . The Department has established by clear and convincing

evidence that Mr. McClosk ey violated section 626.611(16) by

selling an unregistered security that was requ ired to be

registered pursuant to chapter 517.

3 8 . At the time Mr. McCloskey sold the viatical s to

Mr. Bode, Mr. Clemente, and Ms. Teny, the viatical industry was

regulated pursuant to sections 626.991 - 626.9929 5, the Viatical

Settlement Act. However, c hapter 626 did not preempt chapter 517

in determining whether viaticals were securities that had to be

registered pursuant to chapter 517.

39 . In Kligfield v. Off ice of Fin ancial Regulation , 876 So.

2d 36 (Fla. 4th DCA 2004), OFR had filed administrative

complaints against two Florida - licensed life and health insurance

agents who were offering viatical s to their clients. OFR took

the position that the insurance agents were selling unregistered

securities. The insurance agents took the position that the

Florida Securities and Investors Protection Act, chapter 517, had

been preempted by the Viatical Settlement Act. The court agreed

with OFR that chapter 626 did not preempt chapter 517 and that

the viatical purchase agreements were investment contracts tha t

should be registered with OFR.

4 0 . Prior to 2003 , OFR had taken the position that

viatical s were securities as evidenced by the Stipulation and

Consent Agreement entered into in 1996 by the predecessor to OFR,

Department of Banking and Finance , Division of Securities and

Investor Protection, In the Matter of: Life Options

International , Case No. 0069 - I - 8/96, adopted as a Final Order,

November 26, 1996. Additionally, other final orders set forth

the position of the Department of Banking and Finance that

viaticals were securities that had to be registered pursuant to

chapter 517. Dept. Banking & Fin. , Case Nos. 3 - 94 - S - 2/01, 3094a -

D - 2/01, 3126 - S - 2/01 (Fla. DBF December 23, 2002); Dept. Banking &

Finance v. Nicholas , Case No. 3183 - S - 2/01 (Fla. DBF November 28,

2001); Dept. Banking & Fin. v. Priest , Case No. 3185 - S - 2/01 (Fla .

DBF November 26, 2001); and In Re: Breshnahan , No. 2924 - S - 2/00

(Fla. DBF November 28, 2000) .

4 1 . At the time Mr. McCloskey sold the viaticals at issue,

w hether a viatical was a securi ty that had to be registered with

the SEC was not a settled issue. In S ecurities & Exchange

Commission v. Life Partners, Inc. , 87 F.3d 536 (D.C. Cir. 1996),

the United States District Court for the District of Columbia

held that viatical s were not securit ies for the purposes of the

Securities Act of 1933 and the Securities Exchange Act of 1934

because the viatical s depend entirely on the mortality of the

insured rather than the post - purchase managerial or

entrepreneurial efforts of the viatical settlement provider.

42. In S ecurities & Exchange Commission v. Mut ual Benefits

Corp oration , 323 F. Supp. 2d 1337 (S.D. Fla. 2004), the court

noted that Life Partners was the only federal appellate decision

on the issue of whether a viatical was a security. Id. a t 1343,

n.9. The court declined to follow the analysis in Life Partners ,

but stated: "[T]he court hereby certifies that this order

involves a controlling question of law as to which there is

substantial ground for difference of opinion and that an

immedi ate appeal from this order may materially advance the

ultimate termination of the action. " Id. at 1344. The United

States Court of Appeals for the Eleventh Circuit affirmed the

ruling that the viatical s offered by Mutual Benefits were

securities. SEC v. Mutual Ben e fits Corp. , 408 F. 3d 737 (11th

Cir. 2005).

43. At the time that the three viatical s at issue in this

case were purchased, s ection 517.021(20) provided:

(20) "Security" includes any of the

following:

(a) A note.

(b) A stock.

(c) A treasu ry stock.

(d) A bond.

(e) A debenture.

(f) An evidence of indebtedness.

(g) A certificate of deposit.

(h) A certificate of deposit for a security.

(i) A certificate of interest or

participation.

(j) A whiskey warehouse receipt or other

commodity war ehouse receipt.

(k) A certificate of interest in a profit -

sharing agreement or the right to participate

therein.

(l) A certificate of interest in an oil,

gas, petroleum, mineral, or mining title or

lease or the right to participate therein.

(m) A collat eral trust certificate.

(n) A reorganization certificate.

(o) A preorganization subscription.

(p) Any transferable share.

(q) An investment contract.

(r) A beneficial interest in title to

property, profits, or earnings.

(s) An interest in or under a profit - sharing

or participation agreement or scheme.

(t) An option contract which entitles the

holder to purchase or sell a given amount of

the underlying security at a fixed price

within a specified period of time.

(u) Any other instrument commonly know n as a

security at a fixed price within a specified

period of time.

(v) Any receipt for a security, or for

subscription to a security, or any right to

subscribe to or purchase any security.

44. In 2005, there were several amendments to chapter 517,

rel ating to viaticals. S ection 517.021 was amended to include a

viatical settlement investment in the definition of a security.

§ 517.201(20), Fla. Stat. (2005). A viatical settlement

investment was defined as "an agreement for the purchase, sale,

assignme nt, transfer, devise, or bequest of all or a portion of a

legal or equitable interest in a viaticated pol icy as defined in

chapter 626." § 517.201(23), Fla. Stat. (2005). Section 517.072

was created to provide that the exemptions in sections

517.051(6), (8), and (10) did not apply to a viatical settlement

investment. The amendments to chapter 517 were a clarification

of the existing law that a viatical was a security.

4 5 . Florida has adopted the analysis used in Securities and

Exchange Commission v. W.J . Howey Co. , 328 U.S. 293, 299, 66

S. Ct. 1100, 1102, 90 L. Ed. 1244, 1249 (1946) to determine the

existence of an investment contract. Farag v. Nat'l Databank

Subscriptions , 448 So. 2d 1098 (Fla. 2d DCA 1984). In Howey , "a

three - pronged test must be met in order to prove the existence of

an investment contract. . . . First, there must be an investment

of money; second, the investment must be in a common enterprise;

and third, there must be an expectation of profits to be derived

solely from the efforts of another." Id. at 1110 - 1101.

4 6 . In the instant case, Mr. Clemente, Ms. Teny, and

Mr. Bode invested money through the purchase of a viatical.

There was a common enterprise because the y were not the only

purchasers for a specific policy. The monies o f several

purchasers would be pooled to pay for the policy. There was an

expectation of profits to be derived from the efforts of Mutual

Benefits based on the evaluations of life expectancies of t he

insureds by Mutual Benefit. Additionally, Mutual Benefi ts

determined the amount of funds needed to fund the future premiums

of the insureds, and the escrow agent disbursed the funds. The

viaticals at issue meet the Howey test for the elements of an

investment contract, which is listed as a security in section

517.021(20).

4 7 . T he Department has failed to establish by clear and

convincing evidence that Mr. McCloskey violated 626.611(7). The

Department argues that Mr. McCloskey demonstrated a lack of

fitness or trustworthiness to engage in the business of i nsurance

because he was not registered pursuant to chapter 517 to sell

securities and because the viaticals were not registered .

Mr. McCloskey thought that his license to sell life insurance was

all that was required to sell viaticals. Section 626.992(4)

provided that a sales agent of viaticals had to be licensed as a

life agent as defined in section 626.015. Mr. McCloskey did not

understand that viaticals were considered securities and that he

had to be registered pursuant to chapter 517. Mr. McCloskey

called the Department of Insuran ce about viaticals and was told

that viaticals were regulated by the Department of Insurance.

4 8 . The Department has failed to establish by clear and

convincing evidence that Mr. McCloskey violated sections

626.611(9), 62 6.621(2), 626.621(6), 626.954(1)(e), 626.9927(1),

626.99275(1)(b), and 626.99277(6). The Department argues that

these statutes were violated when Mr. McCloskey made the

statement that in the last ten years no one had to pay additional

premiums or lost any money by purchasing a viatical with Mutual

Benefits. There was no evi dence at the final hearing that at the

time the statement was made that it was not true. There is no

evidence to establish that Mr. McCloskey knew that the statement

was false.

4 9 . Mr . McCloskey never told Ms. Teny, Mr. Bode, or

Mr. Clemente that the investment was guaranteed. The Settlement

Agreement clearly states that there is no guarantee that the

insured will die within the expected time or that the purchasers

will never have to pay additional premiums.

50 . Although the viaticals sold by Mr. McCloskey were

required to be registered pursuant to c hapter 517, Mr. McCloskey

was not aware that they had to be registered. He made a good

faith effort to research Mutual Benefits by goin g on line and by

calling the Department of Insurance. The viatical settlement

agreement form, which had been approved for use by the Department

of Insurance, stated that the viaticals were not securities.

There are three instances of selling unregistered securities, and

the appropriate penalty would be a two - month suspension for each

violation, for a total of six months.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is RECOMMENDED that the Department of Financial Servi ces

enter a final order finding that Mr. McCloskey did not violate

sections 626.611(7), 626.611(9), 626.621(2), 626.621(6),

626.9541(1)(e)1., 626.9927(1), 626.99275(1)(b), and 626.99277(6);

finding that Mr. McCloskey violated section 626.611(16); and

suspe nding his license for two month s for each of the three

violations for a total of six months.

DONE AND ENTERED this 18th day of April , 2012 , in

Tallahassee, Leon County, Florida.

S

SUSAN BELYEU KIRKLAND

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 18th d ay of April , 2012 .

ENDNOTE

1/ Unless otherwise indicated, all references to the Florida

Statutes are to the 2003 version.

COPIES FURNISHED:

H. Richard Bisbee, Esquire

H. Richard Bisbee, P.A.

1882 Capital Circle, Northeast, Suite 206

Tallahassee, Flor ida 32308

[e-mail]

James A. Bossart, Esquire

Department of Financial Services

612 Larson Building

200 East Gaines Street

Tallahassee, Florida 32399 - 0333

[e-mail]

Julie Jones, CP, FRP, Agency Clerk

Department of Financ ial Services

612 Larson Building

200 East Gaines Street

Tallahassee, Florida 32399 - 0333

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within

15 days from the date of this Recommended Order. Any exceptions

to this Recommended Order should be filed with the agency that

will issue the Final Order in this case.